Our CEO Stuart Robertson shares the scoop on the many situations that your 401(k) money is protected from creditors and in what instances your money may not be protected:
To recap the video highlights, 401(k) plan monies are typically protected from creditors and bankruptcies. However, if you signed off on a loan with the 401(k) backing it, in this instance, your 401(k) is not likely protected. Also, 401(k) monies don’t tend to be protected from federal agencies such as the IRS, but there are some important things to know with how this works, so read on.
Your 401(k) and the Fed
If there is a reason such as back taxes, child support or alimony, the IRS may garnish your 401(k) money. However, 401(k) accounts legally belong to your employer, and this does offer some protection from federal tax liens, or at least the timing of when the money is taken.
Under the Employment Retirement Income Security Act of 1974 (ERISA), the funds in your 401(k) only legally belong to you once you withdraw them to use as income. Until then, your 401(k) money is legally the property of the plan administrator—your employer—who is only allowed to release them to you. It tends to make no difference if you are an owner of the business or not.
As a result, the IRS is unlikely to be able to force these funds directly out of your account. However, it can requisition all or a portion of any distributions you take—that is, any money you withdraw.
So, in most situations, your 401(k) money is your money and has some nice protections to ensure it remains your money if things go south with creditors or your business. We most certainly hope that this is never something you will encounter. We’re also hoping that knowing these facts may give you some comfort during these uncertain times. Be well.